Amit Rathore's blog about software and startups

Author: Amit Rathore

A few reasons! For context, I recently started helping out over at CEAi. After several years of running my own companies, I decided to join forces with Bradford Cross, because I have wanted a new way to launch startups, find product-market fit, and scale companies, at scale. How do you build a better meta-startup platform? And where do you start, what do you do first? Lots of fun questions, but these things below were my starter hypothesis:

Artificial Intelligence

AI will eat the world.

I’ve been a Lisper for a long time, I’ve enjoyed all the AI books from back in the day, and often wondered when the “AI Winter” would end.

It certainly ended!

With more and more powerful (and cheaper) computing power, newer algorithms are becoming practical, both from a speed and cost perspective. Software was going to eat the world, now AI will eat the software that isn’t using AI techniques.

Cutting Edge Problems

The type of stuff that we’re working on at CEAi is pretty awesome – starting with Merlon Intelligence: an AI driven platform to manage end-to-end financial crimes and compliance (FCC) for banks, insurance, fintech, cryptos etc., to real-estate investment platform that uses data and AI to price homes (B&B), to cyber insurance (TowerStreet), to managing clinical trials using digital mobile end-points (HealthMode), and a new automated trading platform for multiple digital assets (Q).

And many others coming up over the next 2-3 years. Exciting stuff!

Abstractions

Further, I believe in the power of abstraction. At CEAi, a venture studio, we’re refactoring everything that goes into building the companies themselves.

Shared services across business functions such as recruiting/HR, sales development, marketing and growth hacking, etc – these are all often much more powerful and impactful to a startup than just pure software.

And so we’re building these abstractions upon which to instantiate new startups.

Startups!

I’m a huge startup fan-boi. Creating something from nothing, this is what innovation is all about, what the hustle is all about. Sure, not everything succeeds, but that is ok!

Venture Capital, as an asset class, returns pretty poor results – about 7.5%. For all the grand talk that VCs output, this is a pretty shitty showing 🙂

This is all because of the fact that pretty much only 1 in 20 startups really do anything for the IRR. The goal at CEAi is to create a better platform to launch new startups off of, and use all the organizational shared services and learning, to improve these rates. If we’re able to make 1 in 2 startups fail (or succeed!) then we’ve just improved the numbers by 10X. Heck, we’re shooting for a 4X improvement.

Global

CEAi is truly global – we are 2 years old, but thanks to an explicit design decision to be truly distributed, we have 7 offices (and counting!). These include SF and NYC in the US, Prague, Bratislava, Brno, and Kosice in Central EU, and Bangalore in India. Next – probably Budapest and Vienna, along with Tokyo and Beijing/Shanghai.

We go where there’s business and talent!

What’s not to like? 😉

So that is it – doing fun stuff, building amazing things from scratch, the hustle, the game, it’s all here! And that’s why CEAi.

As we continue our journey to transform the online business at Staples, one thing we’re using to guide our product and technology roadmap is automation. We need to optimize on several axes – speed of operations, (and actual throughput), efficiency, correctness, and cost.

Given the size of the business at Staples (the various online pieces combined are several billion dollars a year), we’re moving as much heuristics as possible into automated decision making systems. This will allow us to improve end-to-end throughput, while optimizing revenue and profit, and reducing cost. Similarly, all incidents will be tagged and tracked, so we can do root cause analysis, eliminate potential sources of defects, and even stop the line if needed.

Take, for example, our new expanded catalog. For a long time (over 25 years), we sold less than 30,000 SKUs, all related to office supplies. In the past year or so, we’ve rapidly expanded our assortment. We’re adding whole slews of products, one vertical at a time. For instance, we recently added hospitality, and retail. If you’re a business in those industries, you can now not only buy your office supplies from us, but anything else you need to run your business. You run a restaurant? Buy your cleaning supplies, cutlery, glassware, etc. from us as well.

We recently crossed 500,000 SKUs on offer, and are on track to cross 2 million soon, and over 5 million within a couple of years. The question, of course, is how to market these new products and to whom. Manually devising strategies to market to the right target audiences has its place, of course. At the Innovation Lab, we set our data scientists to work on this problem. By analyzing all available data on the millions of customers we already have, we’re able to figure out what industries a large number of them belong to. We can then automatically show them relevant new products when they log on, or when we send out promotional emails.

Even where we don’t have comprehensive information about our customers, we can computationally determine several things about them. For instance, can you guess the industry someone within an email address of janet@peninsuladental.com belongs to?

Another example is shipment delivery estimates. We already have a world class logistics platform, having been in the business of receiving orders, fulfilling them, and getting them out to our customers within one business day. As we expand our SKUs though, a larger and larger number of our products will be dropshipped by our vendor partners. The variability on these items is much higher, and the shipments tend to be slightly slower as well. By using historical data around inventory levels, handling times, and shipping carriers’ actual delivery tracking data, we’re able to predict when an item is going to reach a shopper with a very high degree of precision. By communicating this to our customers up front, we’re able to provide a much better experience online.

These are just examples of the several projects we have in the works here at the San Mateo based Staples Innovation Lab. Others include things like real-time selling price optimization, smarter personalized email content targeting, dynamic and personalized product bundles, hyper-personalized product recommendations, a new e-commerce search engine, and several others, for this year alone.

The path forward is clear – automation is the key, and algorithms will save the day 🙂

I’m pleased to announce that we’ve engaged Rich Hickey at the Staples Innovation Lab, as Special Technical Advisor. He will provide architectural and general technical oversight across all the products we’re building. These include things like dynamic and personalized pricing, product recommendation engines, email targeting and behavioral retargeting, a new search engine, shipping delivery optimization, etc.

We’re already heavy users of Clojure, Datomic, ClojureScript, Simulant, and Pedestal. So this just makes a ton of sense for us… we’re also working with Cognitect on several initiatives, so having Rich’s oversight will just add to the awesomeness of the team.

Please join me in welcoming Rich to the lab!

P. S. Get in touch with me if you’d like to explore opportunities working with the Clojure stack at the second largest E-Commerce operation in the world.

It’s been over two months since Runa was acquired and we became Staples Innovation Lab. I’ve been meaning to write about this transition, but things have just been so busy. I do think it’s important that I record this journey though, because in a few years time, people will look around and will wonder at the steep rise of Staples. 🙂

We started Runa with the same gleam in our eyes as most Silicon Valley startups – of changing the face of the industry we were in. We chose e-commerce, even though in 2008, it wasn’t exactly sexy. Those were the years of the consumer startups, and no one was even looking at enterprise focused deals. My own viewpoint though was, and still is, that the e-commerce story is still being written. I’m an Amazon.com shareholder, I’ve been using their service ever since I moved to this country over 10 years ago, and I’m a huge fanboy. My appreciation for Jeff Bezos is paralleled only by my admiration for Steve Jobs. Amazon.com has literally defined e-commerce… and is overwhelming every other contender in the space.

So we started Runa with one overarching goal. To help e-commerce merchants survive the Amazon.com onslaught. The idea was that most retailers aren’t technology companies, and don’t have the capabilities to battle Amazon, one of the most advanced tech companies in the world. Further, these folks are unlikely to ever grow such capabilities in-house, for a whole variety of reasons. At Runa, we built out a set of SaaS products, each focused on a specific area. All these services were built on top of a big-data + machine-learning stack. Our output was a run-time platform that ran predictive models to address individual aspects of the shopping experience. Merchants simply plugged our APIs into their world, and we enabled their site.

For instance, we built PerfectOffer to help merchants stop giving away discounts, indiscriminately, to everyone. Our platform built sophisticated statistical models of the behavior of the shoppers, and then in real-time would determine which shopper should get what deal on what product. Or even if they should get an offer at all. Not only was the discount spend made far more efficient (which helped average gross margins), but it also had a highly non-linear positive impact on net margins. Another service we built was called PerfectShipping, which used past seller performance and shipment tracking data to figure out when shoppers could expect to receive their items, with a high degree of confidence, even if merchants used the cheapest carrier services. Online marketplaces and retailers alike used this to take on Amazon Prime’s 2-day free shipping, and the incremental sales numbers this service generated for our large merchants was incredible. Other services included PerfectEmail and PerfectBundles.

By the time Runa was acquired, we were able to count some very large retailers as our customers, including eBay, Groupon, and Target. In July this year, we added Staples. Now, to be clear, we had never thought Staples was a particularly relevant company… actually, I had never really given much thought to Staples at all. However, once they became a customer, I did find out a fair bit about them, and things seemed quite impressive. It turns out, Staples is the world’s second largest e-commerce player, after Amazon.com. Sure, it’s a distant second, but it does make over 10 billion dollars a year online. Remember, this is despite them not being a tech company. Not in any realistic sense of the word.

So when they talked to us about a strategic partnership, and they described where they wanted to go, I realized that this could be an incredible opportunity. My vision for Runa was always this set of AI programs that would drive all aspects of an e-commerce operation. We would use data to optimize just about everything, and all in real-time, all automated. This would drive down costs, and would then allow for lower margins, which would mean cheaper prices for shoppers. And all the while, it would have the amazing side-effect of improving the customer experience. Staples, in my mind, was the perfect place to put this into action. Kind of like a PerfectPlayground 🙂

Staples is an old company – they’re 27 years old, and they’re still a brick-n-mortar retailer at heart. This is changing, and there’s a lot to be done. The reality though is that it was a startup at one point, and that entrepreneurial spirit is still alive. The first phase of the company, in a sense, was the retailer phase, and they opened thousands of stores around the world. All are (or certainly were) amazing cash-generating machines, and even today, even as the the face of stores business is changing, they’ll continue to generate the cash needed to help the overall company as a whole.

I like to think of the offline business as Day 1 for Staples, and we’re now on Day 2. This is going to be a long day, since we’re never going to be done. The good news is that there’s tremendous upside as we execute on this path to becoming a technology company ourselves. There’s much work to be done, and much software to be written. There are plenty of business processes to change. There are plenty of people to win over, Wall Street analysts included. The glory is in the challenge, of course, and this is one heck of a challenge. How does one attempt to build what a company like Amazon.com has built over the past 15 years (at least the relevant e-commerce bits) in a span of just 2-3 years? This is a tech challenge, a people challenge, a process challenge, and a business challenge. It means we can’t do things in the typical, traditional manner. We’ve made very different technology choices (Lisp, anyone?) and are asking all the crazy people we can find, the doers, to join us. The enemy is formidable, but one thing’s for sure: it’s going to be one hell of a fight.

I’ve been researching early-stage financings. I know I’ll soon be talking to investors, so I figured I’d better understand what the various options are and what they mean. I also thought I’d share my research with others, and so if you’re in the same boat as I am, then perhaps this post on the evils of convertible notes will help you 🙂

Before I started researching this topic, I always thought convertible notes were a great way to raise your first round of outside money. The benefits were touted by everyone who were supposed to be in the know:

they’re faster to get done

they’re cheaper to get done

they’re easier to get done (term-sheets are simpler)

they delay the pricing question so you have time and money to build out your company a fair bit before a price is set on it. That’s obviously in your best interest, since your company probably isn’t worth very much when you just start out

everyone is happy, and there are no real downsides to this type of financing

Here’s what I believe now:

it isn’t fair to the very people who take the most risk and believe in you before any one else did. Why? Because, the better your company does, the higher the price they pay for their shares. That just isn’t the right way to treat your earliest backers and well-wishers.

this situation is why most convertibles now have valuation caps on them. So if you’ve raise 2M with a 8M pre cap, you expect to give away at most 20% of your company. And you’re probably cool with that, in fact, the higher the cap, the better, eh? But a cap is not a (minimum) valuation, so what if you later find that you can only find investors at a price of 4M pre? You’d have given away 33% of your company to those initial investors. Maybe that’s OK, but you no longer have a choice in this decision

convertible notes also have a discount associated with them, so in the above scenario, if that discount was 25%, you’d actually have to give away 40% of your company, when you were only ready for 20%. Again, if you thought this was OK to begin with, maybe you’d be OK with it, but you’d no longer have any control on this decision either

These are the reasons that, as an entrepreneur, a convertible debt round is rather bad.

More than the financial reasons, though, my problem is with the misalignment of interests. I’m a very firm believer in partnerships. You want your interests perfectly aligned with your investors. Right? With a convertible round however, even though they wish you success, your investors would rationally hope for a lower price for your company, so their investment works out better. They’d want you to succeed, but not too much. They’d want you to succeed just enough to be able to raise a series A, and then succeed a lot more later. That isn’t aligned.

The color of all money is green, but you get a lot more from your investors than money. And this misalignment screws that up.

Even if it all works out in your favor, I really hate how it isn’t fair to your early investors. These folks took the highest risk, believing in your dreams and capabilities. Punishing them with higher prices isn’t what partnership is about.

So I now think it makes more sense to raise a priced round at a decent valuation. That’s what we’ll look for when we start looking for Zolo Labs.

P. S. – I’m obviously no expert in any of this, and am just getting started on learning about it. So take everything here with several huge grains of salt. Perhaps another thing is that if you’re a super-hot startup and everyone (knowingly) wants to get in, then I imagine it changes this model of thinking…

Many of you know we’re using Datomic for all our storage needs for Zolodeck. It’s an extremely new database (not even version 1.0 yet), and is not open-source. So why would we want to base our startup on something like it, especially when we have to pay for it? I’ve been asked this question a number of times, so I figured I’d blog about my reasons:

This is a long list, but perhaps begins to explain why Datomic is such an amazing step forward. Ping me with questions if you have ’em! And as far as the last point goes, I’ve talked about our technology choices and how they fit in with each other at the Strange Loop conference last year. Here’s a video of that talk.

Marketing is defined as the act of promoting (and selling) your products or services. Folks in most industries consider it an important part of their business, especially in larger companies. For some reason, this seems less true in tech startups.

Instead, most founding teams concern themselves a lot with product and engineering. After all, if you don’t have a product, what are you going to market? While this may seem logical, I’ve come to realize this is a flawed view. I now believe that marketing is a critical function of all startup teams, right up there with product, engineering, recruiting, and, fund-raising.

To come to this realization, I first had to internalize that “marketing” wasn’t a bad word. While the above definition conjures up (at least in my mind) images of sleazy sales people, marketing is actually one of the most important ways of interacting with your customers. And really, are there any unimportant ways of interacting with customers?

As a startup, if there are even a few people out there who are actually willing to give you a few minutes (or seconds!) to listen to what you have to say, hallelujah! Marketing, then, is an opportunity for you to engage them in a dialogue, to explain to them why you exist at all. Most people filter out all forms of traditional marketing, not just because there are too many of them, but because they come across as insincere.

There was a time when running an ad would actually produce decent ROI. This isn’t true any more, of course, and in my mind, here lies the opportunity. Today’s connected world of blogs and social networks have presented us once again with a channel to actually connect with our customers and potential customers. To not just “market” to them, but to actually reach out and have a conversation.

While I filter out most forms of marketing as noise, what does catch my attention is authenticity. The new world of marketing then, is just this form of real and sincere social conversation. For tech startups, it’s the dialogue between the founding team, and their early customers, and their extended community. What an awesome chance to be yourself! It’s an outlet to express your philosophy, your beliefs, and your vision. And yes, perhaps to even talk about your products. It’s an opportunity to hear back from this audience, from those who actually care enough to respond! It’s an opportunity to help those who’re listening (or reading) in some small way, even if they don’t actually buy from you.

Do a search for “startup marketing” on your favorite search engine, and you’ll get thousands of results. But this is really it – this social conversation, where you can put yourself (and your company) out there. You can’t outsource this, this is you! As David Packard once said: marketing is too important to be left to the marketing department.

I’ve written before that of the two sides a startup (the product side, and the distribution side), it is the distribution side that’s the harder one. Marketing, defined the way we just talked about, is key in solving this distribution challenge. And, defined in this way, it doesn’t need to be looked down upon either… after all, you are the marketing 🙂